Qudsia Bano

 Pakistan has recorded a sharp acceleration in money supply growth, defying expectations of a slowdown. Despite the government’s scaled-back involvement in seasonal wheat procurement and a lack of fresh fiscal injections into the rural markets, key monetary aggregates such as Currency in Circulation (CiC), Reserve Money (M0), and Broad Money (M2) have surged past 14% year-on-year since March 2025. The unexpected expansion is now raising critical questions about the State Bank of Pakistan’s intervention and sterilization strategy, reports WealthPK.

Traditionally, liquidity spikes during April to June period were driven by government borrowing for commodity operations, especially wheat procurement, which injected cash into the rural areas and boosted the demand for currency. This year, however, commodity operations debt is in net settlement mode, and no new fiscal flows have entered the system. Yet, the Reserve Money is rising at a rate comparable to the previous high-borrowing years, indicating that another force may be at play.

Monetary experts point to record-high inward remittances as a key driver. In March 2025, coinciding with Ramadan and Eidul Fitr, the monthly remittance inflows jumped by more than 35% year-on-year. Unlike past trends where foreign exchange reserves were shored up through external borrowing, the SBP is now reportedly absorbing surplus foreign exchange from the interbank market to prevent the rupee from appreciating too rapidly. These dollar purchases, if left unsterilized, are injecting large volumes of rupee liquidity into the banking system.

Dr. Imran Khalid, a former senior economist at SBP, told WealthPK that the SBP’s strategy might be unintentionally fuelling a new wave of monetary expansion. “If the remittances are absorbed without sterilization, it creates an excess supply of rupee, which eventually boosts the Reserve Money. This is a silent form of monetization, one that can be inflationary if left unchecked,” he explained. The data supports this view. Between March and November 2024, CiC averaged below 5% year-on-year. Since March 2025, it has averaged close to 15%. Reserve Money, too, has more than doubled its previous growth rate, averaging 13% against 7% in the same comparison period.

What makes the current trend particularly concerning is the absence of a corresponding increase in money demand. Pakistan remains in a low-velocity, high-liquidity environment, meaning that any excess liquidity could translate into delayed but sharp inflationary pressures. According to Dr. Khalid, the SBP must now clarify whether it is sterilizing these rupee injections and, if not, what alternative tools it intends to use to manage inflation.

“The public deserves transparency. If the central bank is shifting from fiscal-driven to remittance-driven liquidity growth, this changes the dynamics of monetary management entirely,” he said. With inflation having shown signs of easing in recent months, an unanticipated liquidity surge risks reigniting price pressures at a time when economic stability remains fragile. The SBP, already navigating complex trade-offs between growth and inflation, now faces the added challenge of managing an influx of remittance-driven rupee liquidity without disrupting its broader monetary policy framework.

Credit: INP-WealthPk